At the annual Reuters Regulation Summit in Washington, D.C., Securities and Exchange Commission Chairman Christopher Cox spoke out in defense of the SEC’s most recent changes to the new executive compensation rules, which were reported on in last week’s Corporate and Financial Weekly Digest.

Critics of the new interim rule, including the Council of Institutional Investors, have complained that the grant date fair value of equity compensation awards was removed from the simplified total compensation number that had been touted as the centerpiece of the new disclosure regime. Under the new rule only equity awards for the requisite service period which match the required financial statement disclosure under Statement of Financial Accounting Standards No. 123, are reflected in that total number. In most cases, this has the effect of only reporting grants that vested during the most recent fiscal year in the total number, rather than the total value of a grant including unvested portions. Critics charge that this makes the total compensation number less meaningful and a less useful yardstick to compare compensation among different companies.

Chairman Cox stressed that critics had misunderstood or overlooked the fact that the grant date fair value of all equity awards made during the year would still appear in detail in a new column in the required disclosure format, and that “100 percent of the options granted in a 12-month period have to be disclosed”. Some commentators, such as Floyd Norris of the New York Times, agreed that it was a “judgment call” whether it was better to capture the full grant date fair value in the total compensation number, risking the inclusion of awards that had not been, and may never be, earned, or track the presentation of such awards as they appear in the financial statements. Additionally, Ann Yerger of the Council of Institutional Investors noted that because employees eligible for retirement who would be able to keep an equity award at retirement are not considered to have a substantive service requirement under FAS 123R, the full grant date fair value of awards to retiree eligible employees will be included in their total compensation number. As a result, awards to retiree eligible employees appear larger than awards to other employees in the simplified total compensation number under the new interim rule, which adds to the lack of comparability. (Reuters, 1/8/07; Society of Corporate Secretaries & Governance Professionals, 1/11/07)